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The Franchise Memorandum

District Court Grants Summary Judgment for Franchisor, Dismissing Its Former Employee’s Claim for Indemnification of Legal Fees in a Criminal Investigation
Posted in Damages

A federal court in Ohio recently held that neither IHOP, nor its parent company, DineEquity, Inc., were obligated to indemnify a former employee of IHOP for the legal fees she had accrued during a criminal investigation. Tangas v. Int’l House of Pancakes, LLC, 2018 WL 776857 (N.D. Ohio Feb. 8, 2018). Tangas had been indicted by the FBI due to her alleged involvement with an IHOP franchisee who was charged with an array of criminal conduct, including underreporting sales, money laundering, conspiracy to harbor illegal aliens, and mail fraud. Tangas—who was a Franchise Bureau Consultant employed by IHOP to supervise the franchisee—had not disclosed to IHOP the scope of her relationship with the franchisee, including a payment of $50,000 that she had allegedly made to him, the circumstances of which were disputed. At the recommendation of her counsel, Tangas also refused to participate in an interview with IHOP’s corporate counsel, in violation of IHOP’s code of conduct, which prompted IHOP to fire her. Although the FBI ultimately dismissed its claims against Tangas, the court held that neither IHOP nor DineEquity was obligated to indemnify Tangas for the $130,000 in legal fees she had accrued before and after her firing.

The court looked to DineEquity’s bylaws and IHOP’s limited liability company agreement to determine whether either entity was obligated to indemnify Tangas. DineEquity’s bylaws required it to indemnify Tangas if it had appointed Tangas, as an employee, to a specific position. The court readily held that Tangas had never been an employee of DineEquity because IHOP paid her salary and issued her W-2 forms. Therefore, DineEquity had no obligation to indemnify Tangas. On the other hand, IHOP’s LLC agreement stated that the company was obligated to indemnify “any employee,” except “with respect to” claims in which the employee “engaged in fraud, willful misconduct, bad faith or gross negligence.” The court first concluded that IHOP’s duty to indemnify applied only to current employees, and therefore IHOP had no obligation to indemnify Tangas for legal fees that accrued after IHOP fired her. Second, the court held that, in light of Tangas’s conduct, IHOP was justified in electing not to indemnify Tangas based on its conclusion, in its reasonable business judgment, that Tangas’s actions constituted willful misconduct and/or fraud. It noted that Tangas’s failure to disclose to IHOP the full scope of her relationship with the IHOP franchisee would support a finding of fraud, particularly considering the evidence of Tangas’s wrongdoing contained in the FBI reports. It further held that Tangas’s refusal to participate in the internal IHOP interview could reasonably be considered willful misconduct. Therefore, the court concluded that neither DineEquity nor IHOP had a duty to indemnify Tangas.

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The Franchise Memorandum is a collection of postings on summaries of recent legal developments of interest to franchisors brought to you by Lathrop GPM LLP. 

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